OK, this is the money management part of the Discipline/Money Management presentation.
The first thing I want to talk about is MARGIN.
You really have to be adequately capitalized when trading or you will be trading from fear. We got run out of our 9th trade because we didn’t have enough money.
One of the things that really bother me is when I see new traders say, “I am switching to XYZ broker because I can trade the ES for only $500 margin per contract. I know that person will likely not be successful because they simply do not have enough capital in their account.
Personally, I use a figure of 5X the amount of required margin per contract in my account. Some people say that is too conservative. For me, that is what I am comfortable with. It makes trading easy for me, since I am never looking at my equity balance if I know there is enough margin to cover it. That again is just me personally.
This is an example of something I use for money management. The guts of money management are really extremely important. Because it allows you accomplish one of your real goals in trading. YOUR REAL JOB DURING THE DAY, IN ADDITION TO TRADING, IS PRESERVING YOUR CAPITAL. There is nothing more important and that’s the reason why for some of us who have been traded a long time, we don’t think about trading without hard stops. We have been around when the market has gone against us for a day or two or three, and WE COULD HAVE BEEN OUT OF THE MARKET WITH A STOP BEFORE THE CASCADE STARTED.
The WIN RATE and the AVERAGE GAIN OR LOSS RELATIONSHIP is really important to understand and I am going to show you an example of why this is so important. You never take a loss caused by the “HOPE MODE”. What happens, as you have heard many times, is what Woodie has said many times. The hope mode becomes the “dammit” mode, then the break the PC mode. For many people, it means going back to a 9 to 5 job working for somebody else again. Most of us who are traders have many reasons. One of the big ones is to have the freedom to do what we want when we want to do it. I think that is why most of us are here. This is why it is important you understand this next part.
I am talk about why the Percentage Win Rate and the Average Win and Average Loss figures are so important.
The next slide is one that I’ve given to many new traders in the room who have had a difficult time understanding the concept of Risk Reward and Money Management and why the Average Win and Average Loss figures are so important and that the Average Gain has to be bigger than your Average Loss. This is the exercise that many people on the chat have done and is what I have given them.
What you are trying to do is what we have seen - to get 5-6-7 white bars in a row when you are long. If you keep getting white bars (close above prior bar close), then keep the position until you get a red bar.
If the first entry bar that you have closes lower than the entry, you immediately cover.
What is happening? This system will actually make you money. Why does it work? It works because you will be long and short an equal number of times. You have no bias to either the long or short side. You will immediately cut your losses if your first bar is a loss but if it is a winner you will let it run.
All I am saying if that if you take random entries by being long or short and you practice good money management you can take this system home and you will find that it will make money for you. THIS IS THE IMPORTANCE OF MONEY MANAGEMENT. You have no choice being long or short and totally unemotional. You are reading no signals. You simply are taking advantage of the fact that you are going to be wrong for one (1) bar all the time, but when you are right, you might be right 3, 4 or 6 bars. This is the system that I gave to Blinky several weeks ago. Then the light finally came on. If you have seen his trading in the last three or four weeks, he has commented several times that this is what finally turned the light on for him.
This is the final chart that I am going to show. It shows the importance of the average win versus the average loss and the importance of closing your stops as quickly as possible.
What this chart says is: Let’s say you put a stop loss in based on the ES, this slide says that if you take a 1 ½ point gain every time it is offered you must be right 50% of the time, before commissions, to break even. Now what we really see quite often, in the chat room, is someone reporting their 1 ½ point stop (6 ticks) and as soon as
they get a one (1) point profit, they get out. 60% of the time you must be correct to break even before commissions
Now, let’s see what happens if you say “OK, I’m going to put in a 6 tick stop but I am going to wait until I get a 2 point gain which is 8 ticks. You only have to be right 46% of the time.
What I have done is color in the yellow area as the area in which I don’t think it is possible for anyone to make money. If you are a trader always taking a stop loss of 6 ticks, and you are always running after you make 3 ticks – you have to be right 67% of the time before commissions to break even.
And every day we see people taking small losses, even though they are taking the full 1 ½ point risk – the initial stop. It also shows you how important it is to move your initial stop loss quickly. Let’s say you when you take the trade and you have a 6 tick stop loss. Then the trade starts going with you a little bit. CCI has hooked in your direction and everything looks good. If you can move that stop down just to 4 ticks instead of 6 ticks, then you only have to be right 40% of the time to break even before commissions.
Taking small losses is really a very big secret.
IN CONCLUSION ---- Keep your trading simple and focused.
Have a trading plan AND FOLLOW IT.
------ Write it down in the morning.
------ This is what I am going to do today.
------ This is what I am going to trade.
------ This is how many points risk I am going to take.
----- Define how and when you are going to exit.
And stick to it. Don’t take any other trade during the day. This is an area where newer traders are often undisciplined. Be adequately capitalized. Those are my rules that I think are effective for a new trader to be successful in this business. It is a tough business.
Comments related to Questions:
(1). When I take a position while trading – there is a stop in. If the market goes
against me I am out. Woodie says, “If you are wrong, get gone.”
(2). In my discussion on getting out on a CCI signal, my favorite signal is get in and
if the trade goes in my favor, I want to ride that trade as long as long as I
possibly can. If that trade goes for me and for example CCI goes to extreme,
that is when I will get out since that probably is the maximum I will get out of
that trade.
If I get in a trade, let’s say I am long, the market starts to go with me, and I see
it bounce off the zero line – I will abandon the trade. It’s done – it’s rejecting it.
(3). The 30/34 strategy was a fall back system I presented to the room a while back.
It would usually produce 2 to 2 ½ ES points a day. Last year, I could see that
I was no longer able to beat the simple Stop and Reverse. I used to be able to
take 45-50 points but that started dropping down. The swings were narrowing.
That is why I said “Let’s abandon it at this point”. At that point, always take
30 points was not beating the stop and reverse. If the situation reversed and
again we are back to the area where 35 point targets ( or higher) beat the stop
and reverse, I’ll get back in again. You need large swings to make it pay.
(4). With the lower volatility markets of today, I am trading all in and all out.
(5). If we have time tomorrow maybe Woodie can talk about covered calls. This is
not the right time to do it now.
(6). GB and Woodie both discussed the reasons for contraction in prices recently.
The topic is interesting but not pursuant to the title of the presentation and so
I am not going to include it in the notes.
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Our Thanks go to Woodie for creating this great Community of Traders.
Saturday, March 21, 2009
UNDERSTANDING THE MARKET
Now, I want to show you some ways that I have found to understand the markets using some of the systems that I trade.
I am not going to go through all these numbers. I am going extract one month to explain what I do. This is the kind of information that I keep for example on my 30/34 strategy. I actually have this data on every trade I did using that system for the past 8 years. This chart is a little chart that shows the process that I go through.
The entry point of every trade is recorded and how far it ran before it changed direction. In other words I record from where the signal was on the entry to the top or the bottom of the swing. I am going to pull out one month of data to show it to you.
The first column, this is actual data from the month of October this year, the entry point to the time to the time it reversed (this is a stop and reverse system) would have given me 26 points. It really ran to the extreme swing high or swing low a total of 36 points. The data in this chart is for the ES contract. If I had been willing to take 45 points on each trade and you can see the pattern all the way down to 35. If I had taken 45 points I would have made the full 36 points and so on.
If I had been willing to take 35 points I would have gotten 35 points on the trade. Here I would have gotten 30 points, and here I would have gotten 25 points.
When you go down to the bottom of the chart and you add up the month, this system would have given me 20 points net if I had taken every signal on a stop and reverse. Look at this, from the time of signal to a swing high or swing low was 140 points and I am trying to figure out how many of those points I could get.
In the type of market we are in I could never have gotten 45 points or 40 or 35. But if I had always been willing to take 30 points on every trade, I would have made 40 points total or twice as much as I would have on a stop and reversal approach.
This type of information allowed me last winter to tell people that I would suggest to stop playing the 30/34 system even though it even though it had been profitable to the extent of over 500 points a year for the last 7 years. I could see that it just wasn’t
running and the swing highs and lows were narrowing. It was time to stop playing this kind of a system. That is how I use this type of a chart.
Here is another one of my trading charts. This one I have actually put up in the room before. This is the bond chart – 5 min bond chart – here is the 34 ema. This day, almost the entire day, I didn’t want to take any CCI signals except shorts. The ema was telling me the market was in a down trend. CCI was pretty much telling me the same thing, all day long, except for one little period here – BE SHORT. The CCI and the 34 ema were confirming each other.
Now, what this chart does – I record this as I am trading during the day. Here is a Zero Line Reject that ran for 13 points after the CCI gave me a signal. Here is another Zero Line Reject that gave me 21 points – possible, I didn’t get the entire profit but the profit was there if I had stayed in. Here is another Zero Line Reject short that ran for 17 points. Here is a Trend Line Break crossing the - 100 which
was a buy by CCI but I would have lost on if I had taken it. There is also a buy here that would have made 8 points and I have another buy here that would have made 9 points.
So what I do during the day, I code all the entries I make on CCI. I may not have all the entries that actually occurred as I may miss some of them. This is what I saw and this is what I use to be in the market .
The interesting thing about this chart is and one of the reasons I use this chart is because I stayed short all day long. This chart gave me the opportunity to add up all the short positions to get 81 bond points if everything was perfect. But everything is not perfect. I managed to get 60% of the moves. Out of the 81 points in real trading
I got about 45 points. That was a good day. I did not take the long positions because they were counter trend. Even on this day the counter trend CCI trades would have been worth +10. I just choose not to take them BECAUSE I AM ONE OF THOSE PEOPLE WHO LIKES A VERY HIGH WIN RATE. I hate to lose.
What do I do with this data? It goes onto this sheet but also goes into EXCEL. Let me explain this chart. I keep track of Zero Line Rejects and Trend Line breaks – what ever I am trading. I don’t need the information every day. If I have a random sample, I am happy if I just have a few days out of the month.
On this chart, I get a signal to go long or short on a Zero Line Reject. It ran for 20 points (the first trade) after I got the signal. If I were taking only 10 points I would have gotten 10 points out of it. If I were taking 12 I would have gotten 12 points. You can follow across the line to see the results with different targets. If I were taking 20 points out of a trade, I would have received all 20 available points.
The 2nd trade that day only ran for 12 points instead of 20. Again, you can see the results across the line. Why do I do this? When I get to the end of the month I get some valuable information from this chart.
These are total points for the month if I always took 8 points on each trade. I would have gotten 196 out of 561 total possible – close to 50%; still a pretty good return.
If I had taken 10 points on each trade I would have received a total of 233. If I had always taken 12 points I would have gotten 265 but if I tried for 14, I would have gotten 285 total points. Now I am clearly over 50% of the total available.
Taking Zero Line Rejects, if I always took 8 points that would be 12.3 points per day per contract on average. If I always took 10 points I would have gotten 14.6 on average per day, and if I had always taken 12 I would have gotten 16.6 and if I had taken 14 I would have gotten 17.7 per day. As you see – it is starting to flatten off here. It is saying to me, you aren’t going to be any better off going for 14, 16 or 18 points than you would if you were shooting for 12 points.
According to data, I had 33 winners and 12 losers for a 73% win rate for Zero Line Rejects for September if I always took 8. If I always took 10 points I would have had a 69% win rate and you can follow the data for other targets across the board here.
Now some of you may recall that during September when we were saying 80% win rate on Zero Line Rejects. The reason for that is that I get out when the CCI tells me to get out, not when it is reaching an objective. Going for an objective, using this as an exit strategy, what this really tells me is this. If I know the optimal return is based on waiting to 12 or 14 points, it tells me don’t take a weak CCI signal to get out of the trade. Don’t run, because the optimum exit is 12 or14 points. If I am at +3 points and I see the CCI begin to turn a little bit, I am not going to run if I know the optimum return is at 14 to 16 points.
This win rate down here at 73% was really 80% for the month of September using CCI exits. It occurred up here. That minus 5 was really a tiny little + getting out with the CCI and this -4 was also another little gain. So when I posted that the CCI win rate for the Zero Line Reject was 80%, it was based on fact. It was not based on guesswork. I know exactly that the market characteristic is telling me to go for 14 or 16 points.
I will still get out if the CCI tells me, but I am going to be real careful before I get out.
A SIMPLE SYSTEM – THE ZERO LINE CROSS STRATEGY
Here is another one of the things that I use. This is the ES contract. The strategy is based on a zero line cross. You go long if the zero line is crossed going up and you go short if the zero line is crossed going down. I like the results of the system except for one thing. It trades about 15 times a day and that is too much for me. I like 3, 4 or 5 trades a day. But if you did nothing with the CCI and go long or short as the zero line crosses occur, during the study period I selected which was 9 days, it averaged
4 and ¼ points a day. You just have to like a lot of zero line crosses.
Replying to a question: Yes, this is a SAR system. You are in the market all day. You reverse positions every time the zero line is crossed. You are either long or short depending on the direction of the zero line cross.
I tend to break the day down into three 2 hour periods. I like to see what the market is doing during the morning, during the mid day and during the afternoon.
Surprisingly, on this chart, what this chart said what that during the mid day the market made a little over 2 points. That was better than what it did on average during the morning or the afternoon. So, at least based on information from this source, the observation that it is not wise to trade during the middle of the day – it just isn’t true.
The floor traders pointed this out to Woodie when he visited the floor. They don’t go to lunch during the middle 2 hours of the day. They go to lunch when the market gets quiet. That may or may not be in the middle 2 hours of the day. So, for some systems, trading in the middle of the day can be good.
I am not going to go through all these numbers. I am going extract one month to explain what I do. This is the kind of information that I keep for example on my 30/34 strategy. I actually have this data on every trade I did using that system for the past 8 years. This chart is a little chart that shows the process that I go through.
The entry point of every trade is recorded and how far it ran before it changed direction. In other words I record from where the signal was on the entry to the top or the bottom of the swing. I am going to pull out one month of data to show it to you.
The first column, this is actual data from the month of October this year, the entry point to the time to the time it reversed (this is a stop and reverse system) would have given me 26 points. It really ran to the extreme swing high or swing low a total of 36 points. The data in this chart is for the ES contract. If I had been willing to take 45 points on each trade and you can see the pattern all the way down to 35. If I had taken 45 points I would have made the full 36 points and so on.
If I had been willing to take 35 points I would have gotten 35 points on the trade. Here I would have gotten 30 points, and here I would have gotten 25 points.
When you go down to the bottom of the chart and you add up the month, this system would have given me 20 points net if I had taken every signal on a stop and reverse. Look at this, from the time of signal to a swing high or swing low was 140 points and I am trying to figure out how many of those points I could get.
In the type of market we are in I could never have gotten 45 points or 40 or 35. But if I had always been willing to take 30 points on every trade, I would have made 40 points total or twice as much as I would have on a stop and reversal approach.
This type of information allowed me last winter to tell people that I would suggest to stop playing the 30/34 system even though it even though it had been profitable to the extent of over 500 points a year for the last 7 years. I could see that it just wasn’t
running and the swing highs and lows were narrowing. It was time to stop playing this kind of a system. That is how I use this type of a chart.
Here is another one of my trading charts. This one I have actually put up in the room before. This is the bond chart – 5 min bond chart – here is the 34 ema. This day, almost the entire day, I didn’t want to take any CCI signals except shorts. The ema was telling me the market was in a down trend. CCI was pretty much telling me the same thing, all day long, except for one little period here – BE SHORT. The CCI and the 34 ema were confirming each other.
Now, what this chart does – I record this as I am trading during the day. Here is a Zero Line Reject that ran for 13 points after the CCI gave me a signal. Here is another Zero Line Reject that gave me 21 points – possible, I didn’t get the entire profit but the profit was there if I had stayed in. Here is another Zero Line Reject short that ran for 17 points. Here is a Trend Line Break crossing the - 100 which
was a buy by CCI but I would have lost on if I had taken it. There is also a buy here that would have made 8 points and I have another buy here that would have made 9 points.
So what I do during the day, I code all the entries I make on CCI. I may not have all the entries that actually occurred as I may miss some of them. This is what I saw and this is what I use to be in the market .
The interesting thing about this chart is and one of the reasons I use this chart is because I stayed short all day long. This chart gave me the opportunity to add up all the short positions to get 81 bond points if everything was perfect. But everything is not perfect. I managed to get 60% of the moves. Out of the 81 points in real trading
I got about 45 points. That was a good day. I did not take the long positions because they were counter trend. Even on this day the counter trend CCI trades would have been worth +10. I just choose not to take them BECAUSE I AM ONE OF THOSE PEOPLE WHO LIKES A VERY HIGH WIN RATE. I hate to lose.
What do I do with this data? It goes onto this sheet but also goes into EXCEL. Let me explain this chart. I keep track of Zero Line Rejects and Trend Line breaks – what ever I am trading. I don’t need the information every day. If I have a random sample, I am happy if I just have a few days out of the month.
On this chart, I get a signal to go long or short on a Zero Line Reject. It ran for 20 points (the first trade) after I got the signal. If I were taking only 10 points I would have gotten 10 points out of it. If I were taking 12 I would have gotten 12 points. You can follow across the line to see the results with different targets. If I were taking 20 points out of a trade, I would have received all 20 available points.
The 2nd trade that day only ran for 12 points instead of 20. Again, you can see the results across the line. Why do I do this? When I get to the end of the month I get some valuable information from this chart.
These are total points for the month if I always took 8 points on each trade. I would have gotten 196 out of 561 total possible – close to 50%; still a pretty good return.
If I had taken 10 points on each trade I would have received a total of 233. If I had always taken 12 points I would have gotten 265 but if I tried for 14, I would have gotten 285 total points. Now I am clearly over 50% of the total available.
Taking Zero Line Rejects, if I always took 8 points that would be 12.3 points per day per contract on average. If I always took 10 points I would have gotten 14.6 on average per day, and if I had always taken 12 I would have gotten 16.6 and if I had taken 14 I would have gotten 17.7 per day. As you see – it is starting to flatten off here. It is saying to me, you aren’t going to be any better off going for 14, 16 or 18 points than you would if you were shooting for 12 points.
According to data, I had 33 winners and 12 losers for a 73% win rate for Zero Line Rejects for September if I always took 8. If I always took 10 points I would have had a 69% win rate and you can follow the data for other targets across the board here.
Now some of you may recall that during September when we were saying 80% win rate on Zero Line Rejects. The reason for that is that I get out when the CCI tells me to get out, not when it is reaching an objective. Going for an objective, using this as an exit strategy, what this really tells me is this. If I know the optimal return is based on waiting to 12 or 14 points, it tells me don’t take a weak CCI signal to get out of the trade. Don’t run, because the optimum exit is 12 or14 points. If I am at +3 points and I see the CCI begin to turn a little bit, I am not going to run if I know the optimum return is at 14 to 16 points.
This win rate down here at 73% was really 80% for the month of September using CCI exits. It occurred up here. That minus 5 was really a tiny little + getting out with the CCI and this -4 was also another little gain. So when I posted that the CCI win rate for the Zero Line Reject was 80%, it was based on fact. It was not based on guesswork. I know exactly that the market characteristic is telling me to go for 14 or 16 points.
I will still get out if the CCI tells me, but I am going to be real careful before I get out.
A SIMPLE SYSTEM – THE ZERO LINE CROSS STRATEGY
Here is another one of the things that I use. This is the ES contract. The strategy is based on a zero line cross. You go long if the zero line is crossed going up and you go short if the zero line is crossed going down. I like the results of the system except for one thing. It trades about 15 times a day and that is too much for me. I like 3, 4 or 5 trades a day. But if you did nothing with the CCI and go long or short as the zero line crosses occur, during the study period I selected which was 9 days, it averaged
4 and ¼ points a day. You just have to like a lot of zero line crosses.
Replying to a question: Yes, this is a SAR system. You are in the market all day. You reverse positions every time the zero line is crossed. You are either long or short depending on the direction of the zero line cross.
I tend to break the day down into three 2 hour periods. I like to see what the market is doing during the morning, during the mid day and during the afternoon.
Surprisingly, on this chart, what this chart said what that during the mid day the market made a little over 2 points. That was better than what it did on average during the morning or the afternoon. So, at least based on information from this source, the observation that it is not wise to trade during the middle of the day – it just isn’t true.
The floor traders pointed this out to Woodie when he visited the floor. They don’t go to lunch during the middle 2 hours of the day. They go to lunch when the market gets quiet. That may or may not be in the middle 2 hours of the day. So, for some systems, trading in the middle of the day can be good.
FOCUS
Discipline involves not only discipline but also very, very important is FOCUS. You have to be focused on the market during the day to be successful. Then you need market knowledge.
Many of us have endless disruptions during the day. For example, if you are trading from home and your wife or husband is home during the day or if you have little kids around, you have to figure out a way to have time to yourself, so that when you are looking at the market you are totally focused on the market.
If you have ever had a 2 year old sitting in your lap trying to punch the keyboard, it is awfully hard to trade.
Under disruptions there are a few other things that I have seen every week that are disturbing to me when I see new traders doing them. One is the need to have the latest and greatest gadget. Some of you who are new feel you absolutely have to have a front end to trade with. It is a wonderful tool for experienced traders to get in and out of the market quickly. For new traders it is totally unnecessary. It is a piece of software that gets between you and order execution and it is a piece of software in which something goes wrong quite often. Often in the chat room, I see the comment,
“Geeze, I lost a hundred dollars because my front end didn’t do what I thought it was going to do.” or “It didn’t fill my order”. I really do feel that a front end is a distraction for new traders.
Another thing that I think is a distraction is traders who don’t have a complete chart service; for instance people with Sierra Charts and the IB data feed. I recognize that it is inexpensive, but the disruption during the day reflected in “Please send me some data-I have some blanks.” or “I’ve have a continuous chart and I can’t trade for the first 45 minutes because I don’t have data.” I think it is a real mistake for new traders. For ten dollars you can have a service that fills in the missing prices for you – for $10.00 a month. Or you can use something like MyTrack. I really think that the trader needs to have charts up and fully complete and does not need the distraction from trading by having incomplete data. This is also something I feel very strongly about.
One of the other things I wanted to talk about is UNDERSTANDING YOUR MARKET
The first point I want to make is HAVE A STRATEGY. When you come in the morning and start the day, my plan, for instance, is to take zero line rejects and
and trades from extreme only. That is all I am going to do today. I am not going to trade the whole gamut. I think for new traders that you don’t want to learn more than one or two of the trades at a time.
So, come in the morning with a strategy and tell yourself what you are going to do. Write it down on a piece of paper. That day that strategy is ALL THAT YOU DO.
That includes totally not looking at any other set-ups, determining what your initial stop will be on your position and also when you are going to take profits. For me, that means when you get a clear signal on the CCI to get out of a trade – You get out!
Many of us have endless disruptions during the day. For example, if you are trading from home and your wife or husband is home during the day or if you have little kids around, you have to figure out a way to have time to yourself, so that when you are looking at the market you are totally focused on the market.
If you have ever had a 2 year old sitting in your lap trying to punch the keyboard, it is awfully hard to trade.
Under disruptions there are a few other things that I have seen every week that are disturbing to me when I see new traders doing them. One is the need to have the latest and greatest gadget. Some of you who are new feel you absolutely have to have a front end to trade with. It is a wonderful tool for experienced traders to get in and out of the market quickly. For new traders it is totally unnecessary. It is a piece of software that gets between you and order execution and it is a piece of software in which something goes wrong quite often. Often in the chat room, I see the comment,
“Geeze, I lost a hundred dollars because my front end didn’t do what I thought it was going to do.” or “It didn’t fill my order”. I really do feel that a front end is a distraction for new traders.
Another thing that I think is a distraction is traders who don’t have a complete chart service; for instance people with Sierra Charts and the IB data feed. I recognize that it is inexpensive, but the disruption during the day reflected in “Please send me some data-I have some blanks.” or “I’ve have a continuous chart and I can’t trade for the first 45 minutes because I don’t have data.” I think it is a real mistake for new traders. For ten dollars you can have a service that fills in the missing prices for you – for $10.00 a month. Or you can use something like MyTrack. I really think that the trader needs to have charts up and fully complete and does not need the distraction from trading by having incomplete data. This is also something I feel very strongly about.
One of the other things I wanted to talk about is UNDERSTANDING YOUR MARKET
The first point I want to make is HAVE A STRATEGY. When you come in the morning and start the day, my plan, for instance, is to take zero line rejects and
and trades from extreme only. That is all I am going to do today. I am not going to trade the whole gamut. I think for new traders that you don’t want to learn more than one or two of the trades at a time.
So, come in the morning with a strategy and tell yourself what you are going to do. Write it down on a piece of paper. That day that strategy is ALL THAT YOU DO.
That includes totally not looking at any other set-ups, determining what your initial stop will be on your position and also when you are going to take profits. For me, that means when you get a clear signal on the CCI to get out of a trade – You get out!
DISCIPLINE
Let’s start on discipline
Most new traders spend 85% of their time and effort on charts and indicators; 15% of their time is spent on studying discipline and money management. This is a number that has come from statistical studies and many of us who are long time traders believe the figures to be true.
Successful traders spend 15% of their effort on charts and indicators and 85% study on discipline and money management. I would like to ask you all. Do you think that it is just coincidental that 85% of new traders fail in their first year?
if they don’t put the effort into discipline and focus and money management?
I want to go to some of the charts we have seen in the chat room and we still see them.
This is a chart from one of the members of my chat room. Anyone recognize this chart? I have to be honest about it. This is one of Fed’s charts. He had a chart that looked very similar to this and I asked him if he could put a few more indicators on it. He did. This chart is really quite a chart. Down here is the CCI. Here is the smoothed CCI. Just to be sure he has put Bollinger Bands around the CCI. When we get up here – you may recognize price bars. There are a variety of colored lines some of which turn color depending on if they are going up or going down. We have a LSMA and several Moving Averages in there. Just to make sure things don’t get away from us he has put Keltner Bands on the top and bottom. Guess that we should stay inside of those.
This is a hard chart for me to read. Some of the indicators say BUY and some of them say SELL; some of them say STAND ASIDE.
Keep in mind that it takes most people 3-5 seconds to interpret ANY ONE LINE, what happens when traders use a chart like this (remembering that there are probably 22 lines in there) is that you will take close to a minute and a half to figure out what the chart is saying and by the time you have done this, THE TRADE IS GONE.
You simply cannot react to this kind of a chart you have to think about it – you all know “WE JUST REACT; WE DON’T THINK”.
My favorite in this chart is the little bouncing balls. Some of them red, some blue, some green, I guess. They are called “ergotics”. I bring that up because I notice the past week that the latest fad in the chart room is to have ergotics on your chart. We went through this about 7-8 months ago when FED introduced ergotics then everyone made a mad rush to put them on their chart. They have faded a bit in the past few months; we seem to be on an ergotic kick again. Everyone wants the latest and greatest indicator.
Now this is a chart that appeared in the chat about 2 weeks ago that one of the traders was using. Some of us moderators had a bit of an argument as to which of us was going to be able to use this chart. It has price bars and a series of moving averages. I can’t determine which moving average to use because I can’t process that much information in 5-10 seconds. One thing I know for sure – one of those lines will be correct. OK.
Now I am going to go to a chart……. Can anyone recognize that chart? There is only one person who uses charts like that. That is Woodie’s 6 bar Sierra chart. This is what he uses for himself when he is not moderating. You will notice that he doesn’t even have an LSMA. It just has prices on it. It has the CCI and the turbo. You all know that Woodie does not take trades off the turbo. So essentially what this chart consists of is a chart with prices and ONE indicator. He uses the turbo as an early warning signal and to draw trend lines. Compare this chart to the other charts that I have shown. Can you see how easy it is to react to this chart? You don’t have to think about it. All you have to do is react! It is very easy to process just one variable. The only thing you have to do is REACT. There is no thinking involved.
And I think we all know that Woodie is a very successful trader – and he gets by with only one indicator!
This is one of my charts. This is what I use for trading CCI. I have the CCI here and the turbo is displayed below the CCI. I can put them together, but I like to see them separated since I have a difficult time reading the turbo displayed over the CCI. That is just one of my peculiarities. It just works for me.
What I have here is a 5 min Bond chart which has a 34 ema. That is my baby blanket. I cannot give it up even when I am trading the CCI. I have to have my 34ema on my charts. When I trade, I ONLY TRADE IN THE DIRECTION OF THE 34 EMA.
I will take the CCI signals, but I will only take them in the direction of the 34 ema. In the chart, for instance, coming down here where the 34ema is headed down, I won’t take any CCI signal unless it is a short signal – that is in the direction of the 34ema. I will not take a counter-trend trade.
When the 34 ema flattens out in this area that means “Go walk the dog”. I DON’T TAKE TRADES WHEN THE MARKET IS FLAT. That is one of my peculiarities.
That is my trading style. I know many of you will take every CCI signal.
When the 34ema starts going up as in this area, then I will start taking every CCI signal that puts me in the market LONG.
Quite honestly, my favorite trades are the ZERO LINE REJECTS and the TREND LINE BREAKS THAT COME BACK THROUGH THE 100 LINE. When you are taking those with the 34ema trend, they are 80%. That is a heck of a win rate. I will settle for that.
I am going to digress here for a minute from the CCI and what we do in the room. I am going to show you a chart to make a point.
This is THE CHART of the most successful trader I have ever met. He is a guy who has made mega millions of dollars in the market. This is his chart. It is a 30 minute chart with a 34 ema on it. He only trades in the direction of the 34ema. He has many decision points on this chart just like we have rules in CCI. I am not trying to sell anyone on using it. One of these rules is “When price crosses the 34 ema the first time and then comes back and touches the 34ema (kisses the 34), then mortgage the farm. I don’t want to get into how he trades. Here is how effective the “kiss system” is. He quite often puts his positions on at the end of the day since he likes to fish during the day. He goes fishing the next morning and doesn’t look at the market until it is ready to close again. We have vacuuming trades and pie making trades; he has his fishing trade.
Most new traders spend 85% of their time and effort on charts and indicators; 15% of their time is spent on studying discipline and money management. This is a number that has come from statistical studies and many of us who are long time traders believe the figures to be true.
Successful traders spend 15% of their effort on charts and indicators and 85% study on discipline and money management. I would like to ask you all. Do you think that it is just coincidental that 85% of new traders fail in their first year?
if they don’t put the effort into discipline and focus and money management?
I want to go to some of the charts we have seen in the chat room and we still see them.
This is a chart from one of the members of my chat room. Anyone recognize this chart? I have to be honest about it. This is one of Fed’s charts. He had a chart that looked very similar to this and I asked him if he could put a few more indicators on it. He did. This chart is really quite a chart. Down here is the CCI. Here is the smoothed CCI. Just to be sure he has put Bollinger Bands around the CCI. When we get up here – you may recognize price bars. There are a variety of colored lines some of which turn color depending on if they are going up or going down. We have a LSMA and several Moving Averages in there. Just to make sure things don’t get away from us he has put Keltner Bands on the top and bottom. Guess that we should stay inside of those.
This is a hard chart for me to read. Some of the indicators say BUY and some of them say SELL; some of them say STAND ASIDE.
Keep in mind that it takes most people 3-5 seconds to interpret ANY ONE LINE, what happens when traders use a chart like this (remembering that there are probably 22 lines in there) is that you will take close to a minute and a half to figure out what the chart is saying and by the time you have done this, THE TRADE IS GONE.
You simply cannot react to this kind of a chart you have to think about it – you all know “WE JUST REACT; WE DON’T THINK”.
My favorite in this chart is the little bouncing balls. Some of them red, some blue, some green, I guess. They are called “ergotics”. I bring that up because I notice the past week that the latest fad in the chart room is to have ergotics on your chart. We went through this about 7-8 months ago when FED introduced ergotics then everyone made a mad rush to put them on their chart. They have faded a bit in the past few months; we seem to be on an ergotic kick again. Everyone wants the latest and greatest indicator.
Now this is a chart that appeared in the chat about 2 weeks ago that one of the traders was using. Some of us moderators had a bit of an argument as to which of us was going to be able to use this chart. It has price bars and a series of moving averages. I can’t determine which moving average to use because I can’t process that much information in 5-10 seconds. One thing I know for sure – one of those lines will be correct. OK.
Now I am going to go to a chart……. Can anyone recognize that chart? There is only one person who uses charts like that. That is Woodie’s 6 bar Sierra chart. This is what he uses for himself when he is not moderating. You will notice that he doesn’t even have an LSMA. It just has prices on it. It has the CCI and the turbo. You all know that Woodie does not take trades off the turbo. So essentially what this chart consists of is a chart with prices and ONE indicator. He uses the turbo as an early warning signal and to draw trend lines. Compare this chart to the other charts that I have shown. Can you see how easy it is to react to this chart? You don’t have to think about it. All you have to do is react! It is very easy to process just one variable. The only thing you have to do is REACT. There is no thinking involved.
And I think we all know that Woodie is a very successful trader – and he gets by with only one indicator!
This is one of my charts. This is what I use for trading CCI. I have the CCI here and the turbo is displayed below the CCI. I can put them together, but I like to see them separated since I have a difficult time reading the turbo displayed over the CCI. That is just one of my peculiarities. It just works for me.
What I have here is a 5 min Bond chart which has a 34 ema. That is my baby blanket. I cannot give it up even when I am trading the CCI. I have to have my 34ema on my charts. When I trade, I ONLY TRADE IN THE DIRECTION OF THE 34 EMA.
I will take the CCI signals, but I will only take them in the direction of the 34 ema. In the chart, for instance, coming down here where the 34ema is headed down, I won’t take any CCI signal unless it is a short signal – that is in the direction of the 34ema. I will not take a counter-trend trade.
When the 34 ema flattens out in this area that means “Go walk the dog”. I DON’T TAKE TRADES WHEN THE MARKET IS FLAT. That is one of my peculiarities.
That is my trading style. I know many of you will take every CCI signal.
When the 34ema starts going up as in this area, then I will start taking every CCI signal that puts me in the market LONG.
Quite honestly, my favorite trades are the ZERO LINE REJECTS and the TREND LINE BREAKS THAT COME BACK THROUGH THE 100 LINE. When you are taking those with the 34ema trend, they are 80%. That is a heck of a win rate. I will settle for that.
I am going to digress here for a minute from the CCI and what we do in the room. I am going to show you a chart to make a point.
This is THE CHART of the most successful trader I have ever met. He is a guy who has made mega millions of dollars in the market. This is his chart. It is a 30 minute chart with a 34 ema on it. He only trades in the direction of the 34ema. He has many decision points on this chart just like we have rules in CCI. I am not trying to sell anyone on using it. One of these rules is “When price crosses the 34 ema the first time and then comes back and touches the 34ema (kisses the 34), then mortgage the farm. I don’t want to get into how he trades. Here is how effective the “kiss system” is. He quite often puts his positions on at the end of the day since he likes to fish during the day. He goes fishing the next morning and doesn’t look at the market until it is ready to close again. We have vacuuming trades and pie making trades; he has his fishing trade.
WHAT ARE THE PROBLEMS FOR THE NEW TRADER?
Before we get into the presentation on where we are today, I would like to read to you some points from a study from 500 brokers that covers some 10,000 futures traders and it ranks as a list why traders fail. I am going to read only a few of these
because they are pertinent to what I am going to say in my presentation.
Remember this is from a study on why new traders fail:
---- They trade without a plan
---- They do not define specific risk or profit objectives before trading.
---- Even if they do establish a plan, they second guess it and don’t stick to it.
Note: That is why Woodie likes to trade without prices because prices scare you
and you change your plan.
---- That is particularly true when they have a loss (they don’t stay with plan).
Consequently, they over trade and they lose their equity.
---- Usually they liquidate their good trades and keep the bad ones.
---- They often fail to take a pre-defined risk – they add to a losing position and
fail to use stops.
GB Note: I never trade without a stop unless I am swing trading. If I
day trading, there is a stop in there very time.
---- New traders who fail often have a directional bias. They come to the session in
the morning and because of some news item, they have a directional bias to be
long all day long. That will kill you in day trading.
---- Many traders break the cardinal rule: Cut losses short and let profits run.
---- Many traders will trade with their heart instead of their head. For some traders,
adversity or success distorts judgment. That is why they should have a plan and
stick to it. In my opinion, many traders hold a loser too long.
---- New traders do not discipline themselves to take small losses and big gains.
Note: How many times have you heard Woodie say that, “Don’t get in the hope
mode!” That leads to the what so ever mode and that leads to dammit
mode.
---- Lack of discipline includes several lesser items: For example, impatience and the
need for action. For me, that means if I haven’t had a trade for 3 hours and I
am getting bored, and I am looking for something to do. I see something that
looks kind of good and I press the buy or sell button. Usually things don’t turn
out too well when that happens.
The next two are two that I feel strongly about.
---- A lot of traders trade against the trend. In the CCI that is when you have 5-6
bars above or below the zero line – without reasonable stops. For me, that is
something I will not do. I will not trade against the trend – except for a couple
of specific trades.
----There is a striking inability to stay with winners. Most traders are willing to take
small profits and therefore miss out on the big profits. For instance, you get 2-3
points profit and you get concerned it might go away if you wait too long
so you get out with your 2-3 points.
These are some things about people who are just starting out that I wanted to share with you because they are germane to what I am going to say from here on.
Many of my comments today are based on my own experience and also the experience from talking to many other traders. I talk to a lot of long time traders.
I am going to throw out quite a few numbers at you. I can’t necessarily prove that they are right, but I believe them to be true. I know from talking to Woodie and Carolyn that we all pretty much agree on these numbers.
because they are pertinent to what I am going to say in my presentation.
Remember this is from a study on why new traders fail:
---- They trade without a plan
---- They do not define specific risk or profit objectives before trading.
---- Even if they do establish a plan, they second guess it and don’t stick to it.
Note: That is why Woodie likes to trade without prices because prices scare you
and you change your plan.
---- That is particularly true when they have a loss (they don’t stay with plan).
Consequently, they over trade and they lose their equity.
---- Usually they liquidate their good trades and keep the bad ones.
---- They often fail to take a pre-defined risk – they add to a losing position and
fail to use stops.
GB Note: I never trade without a stop unless I am swing trading. If I
day trading, there is a stop in there very time.
---- New traders who fail often have a directional bias. They come to the session in
the morning and because of some news item, they have a directional bias to be
long all day long. That will kill you in day trading.
---- Many traders break the cardinal rule: Cut losses short and let profits run.
---- Many traders will trade with their heart instead of their head. For some traders,
adversity or success distorts judgment. That is why they should have a plan and
stick to it. In my opinion, many traders hold a loser too long.
---- New traders do not discipline themselves to take small losses and big gains.
Note: How many times have you heard Woodie say that, “Don’t get in the hope
mode!” That leads to the what so ever mode and that leads to dammit
mode.
---- Lack of discipline includes several lesser items: For example, impatience and the
need for action. For me, that means if I haven’t had a trade for 3 hours and I
am getting bored, and I am looking for something to do. I see something that
looks kind of good and I press the buy or sell button. Usually things don’t turn
out too well when that happens.
The next two are two that I feel strongly about.
---- A lot of traders trade against the trend. In the CCI that is when you have 5-6
bars above or below the zero line – without reasonable stops. For me, that is
something I will not do. I will not trade against the trend – except for a couple
of specific trades.
----There is a striking inability to stay with winners. Most traders are willing to take
small profits and therefore miss out on the big profits. For instance, you get 2-3
points profit and you get concerned it might go away if you wait too long
so you get out with your 2-3 points.
These are some things about people who are just starting out that I wanted to share with you because they are germane to what I am going to say from here on.
Many of my comments today are based on my own experience and also the experience from talking to many other traders. I talk to a lot of long time traders.
I am going to throw out quite a few numbers at you. I can’t necessarily prove that they are right, but I believe them to be true. I know from talking to Woodie and Carolyn that we all pretty much agree on these numbers.
PROCESS OF TRADING
I’d like to describe the process of trading a little bit to give you an idea why we learned discipline and money management in those days.
First of all, all trading was done through a broker. There were no electronic orders with 1 second fills. So we had to call our broker. By the way, he got a $50.00 commission for doing this. It was not $4.80 like today. We had to call the broker for orders, fills, prices and anything to do with the market. We either had to call the broker or he had to call us.
The process of ordering was rather cumbersome. First of all we had to call the broker to place the order. He would then send the order by teletype or some mode of communication link to the desk that his firm had on the floor. That desk then would send that order ticket to a runner who ran into the pit to try to find their trader. Their floor trader would fill the order, and once he got it filled, he had to get in contact with the runner so he could give it to the runner who would run it back to the trading desk. The trading desk, assuming they were not out to lunch, would then transfer the fill back to the broker, who then in turn would call us. This process would fully take 15 minutes to 2 hours. Often, we didn’t know if we were in the market or out of the market.
Why is that important? It is important because we learned discipline and money management.
We learned that when we gave the order to the broker and also give him some further instructions at the same time. We gave him the stop loss order so as soon as he got the order, he could put in the stop loss immediately after the original order was filled and we also gave him a cover.
So if say we were trading wheat with a 1 and ½ point stop, we would put in the order at 50 and we got filled, we would put in a stop loss order of say 48 and ½. Our cover order would be 53.0. What we were doing was we said we would accept a 1 ½ point loss, but would not settle for less than a 3 point gain. That is a 2 to 1 ratio which is pretty much what I think you have to strive for as a winning trader.
This lack of information started to change a little over 20 years ago. That was when Quotrek came out with their service. You could get charts for the first time that were less than weekly. We also even had some indicators. For the first time, non-pit traders had access to real time prices from Quotrek. You didn’t have to talk to your broker. I have my old Quotrek here. I’ll pass it around so you can look at it. This is what we had to get prices about 20 years ago. We could see one future at a time – we could get the open high, low and last price. We had to scroll through it to find whatever we were trading. I am going to turn it on so you can see it. It still works but you just can’t get any prices with it.
Now we have internet information and indicators. That is really a problem with trading today. New traders are absolutely totally on information overload. There is so much information available, they can’t sort it out. That is a major, major problem in trading today.
First of all, all trading was done through a broker. There were no electronic orders with 1 second fills. So we had to call our broker. By the way, he got a $50.00 commission for doing this. It was not $4.80 like today. We had to call the broker for orders, fills, prices and anything to do with the market. We either had to call the broker or he had to call us.
The process of ordering was rather cumbersome. First of all we had to call the broker to place the order. He would then send the order by teletype or some mode of communication link to the desk that his firm had on the floor. That desk then would send that order ticket to a runner who ran into the pit to try to find their trader. Their floor trader would fill the order, and once he got it filled, he had to get in contact with the runner so he could give it to the runner who would run it back to the trading desk. The trading desk, assuming they were not out to lunch, would then transfer the fill back to the broker, who then in turn would call us. This process would fully take 15 minutes to 2 hours. Often, we didn’t know if we were in the market or out of the market.
Why is that important? It is important because we learned discipline and money management.
We learned that when we gave the order to the broker and also give him some further instructions at the same time. We gave him the stop loss order so as soon as he got the order, he could put in the stop loss immediately after the original order was filled and we also gave him a cover.
So if say we were trading wheat with a 1 and ½ point stop, we would put in the order at 50 and we got filled, we would put in a stop loss order of say 48 and ½. Our cover order would be 53.0. What we were doing was we said we would accept a 1 ½ point loss, but would not settle for less than a 3 point gain. That is a 2 to 1 ratio which is pretty much what I think you have to strive for as a winning trader.
This lack of information started to change a little over 20 years ago. That was when Quotrek came out with their service. You could get charts for the first time that were less than weekly. We also even had some indicators. For the first time, non-pit traders had access to real time prices from Quotrek. You didn’t have to talk to your broker. I have my old Quotrek here. I’ll pass it around so you can look at it. This is what we had to get prices about 20 years ago. We could see one future at a time – we could get the open high, low and last price. We had to scroll through it to find whatever we were trading. I am going to turn it on so you can see it. It still works but you just can’t get any prices with it.
Now we have internet information and indicators. That is really a problem with trading today. New traders are absolutely totally on information overload. There is so much information available, they can’t sort it out. That is a major, major problem in trading today.
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